07 January 2014

What is the Official Poverty Rate?

The notion of a “poverty rate” is pretty simple: come up with a definition of “poverty,” determine a quantitative measure that corresponds to that definition, and then count up the number of people who are in “poverty” under that measure.

Being in poverty is of course a subjective determination which can be defined in many different ways. This post focuses on the “poverty rate” as defined by the Census Bureau of the US government. The official US poverty rate is the focus on much informed public discussion. For instance, the New York Times referred to the “poverty rate” 248 times over the past 12 months, about 5 times per week. This post describes the poverty rate as background for a bit of analysis to come on this blog.

Following the Office of Management and Budget's (OMB) Statistical Policy Directive 14, the Census Bureau uses a set of money income thresholds that vary by family size and composition to determine who is in poverty. If a family's total income is less than the family's threshold, then that family and every individual in it is considered in poverty. The official poverty thresholds do not vary geographically, but they are updated for inflation using Consumer Price Index (CPI-U). The official poverty definition uses money income before taxes and does not include capital gains or noncash benefits (such as public housing, Medicaid, and food stamps).

There is in fact not a single official “poverty rate” but 48 different official poverty rates that are calculated based on family size and age. For instance, in 2013 an individual would officially be in poverty with an income of $11,490, which works out to $32.11 per day. For comparison, someone working at the US federal minimum wage (assuming 2,000 hours work in a year) would make $14,500. In its discussions of global poverty, the UN often uses a threshold of $1.00 per day (and sometimes $1.25 or $2.00). In 2012, 46.5 million Americans (15%) were determined to be in poverty under the official threshold.

There are also some very important clarifications about what is not counted as income:

Noncash benefits (such as food stamps and housing subsidies) do not count.

Before taxes.

Excludes capital gains or losses.

If a person lives with a family, add up the income of all family members. (Non-relatives, such as housemates, do not count.)

Immediately we can begin to see some problems with the official poverty threshold in that it fails to include non-cash benefits, which are of course fundamental to many government programs which target low-income households. Of course, because many of the programs are based on pre-assistance income in order to determine eligibility they necessitate leaving such benefits out. Nonetheless, the resulting picture of poverty is thus biases. These shortfalls are well-understood and the subject of some interesting new research (to be discussed soon).

Yet, there is a deeper problem with the official poverty thresholds. We might ask why is the poverty rate (for an individual in this case) set at $11,720 in 2013? Why is that number the demarcation of being "in poverty."

The answer is pretty remarkable.

The official poverty rate was initially developed in the early 1960s, based on a long history of research and debates over the measurement of poverty (this paper by Gordon M. Fisher provides a detailed look at that history). The more proximate history of the early 1960s involved several analyses by Mollie Orshansky see this in PDF) of the Social Security Administration which arrived at a quantification of a poverty threshold. Lyndon Johnson declared a “war on poverty” soon after Mollie Orshansky published her first paper on poverty thresholds.

Orshansky came up with a threshold based on how much it cost to feed a family (this history is detailed in this paper in PDF by Fischer). Quantification of how much it cost to feed a family was based on a survey done by the US Department of Agriculture, initially in 1933 and extended in 1961 based on data from 1955 to include an “economy food plan.” Orshansky assumed that a family would spend one third of its income on food. The poverty threshold was then determined to be that point at which family income was low enough such that the amount spent on food equaled that determined to be necessary under the “economy food plan” calculated based on food prices of 1964.

At that point Orshansky assumed (as quoted in Fisher):

“the housewife will be a careful shopper, a skillful cook, and a good manager who will prepare all the family’s meals at home.“

Fisher explains further of the assumptions:

Orshansky made the assumption that, at that point, the family’s nonfood expenditures would also be minimal but adequate, and established that level of total expenditures as the poverty threshold for a family of that size. Since the family’s food expenditures would still be one-third of its total expenditures, this meant that (for families of three or more persons) the poverty threshold for a family of a particular size and composition was set at three times the cost of the economy food plan (or the low-cost food plan) for such a family. The factor of three by which the food plan cost was multiplied became knownas the “multiplier.”

It is important to note that Orshansky’s “multiplier” methodology for deriving the thresholds was normative, not empirical-that is, it was based on a normative assumption involving (1955) consumption patterns of the population as a whole, and not on the empirical consumption behavior of lower-income groups.

Since the introduction of the original poverty thresholds used by the US government (which were formalized in 1969) they have only been adjusted for inflation based on the Consumer Price Index (it's true, I did the math). In other words, to be in poverty in the United States means that you have income three times greater than that determined necessary to consume an adequate diet as assessed in 1955. Today, that same multiplier would be closer to 8 as food represents a much smaller share of consumer spending.

If that seems to you to be odd or dated, then you’ll be in good company. In 1995 the National Research Council prepared a major report (Measuring Poverty) on the poverty thresholds and found them to be outdated and no longer reflective of the conditions which they first were proposed to represent.

The NRC explained:

Overall, except for the minor changes in the number of different thresholds and the change in the price index for updating them, the poverty line has not been altered since it was first adopted in 1965. In the language of poverty measurement, the United States has an "absolute" poverty threshold that is updated for price changes but not for real growth in consumption. Thus, the poverty line no longer represents the concept on which it was originally based—namely, food times a food share multiplier—because that share will change (and has changed) with rising living standards. Rather, the poverty threshold reflects in today's dollars the line that was set some 30 years ago. . .

We find that the current official poverty measure has a number of weaknesses, involving both the thresholds and the definition of family resources. (Some of these problems were pointed out in the 1960s by Orshansky herself.) Although they were not necessarily important or obvious at the time the measure was adopted, these problems have become more evident and more consequential because of far-reaching social and economic changes, as well as changes in public policy, that have occurred since the 1950s and 1960s. These changes involve labor force participation, family composition, geographic price differences, growth in medical care costs and benefits, government taxation, the provision of in-kind benefits to families and individuals, and the overall increase in the standard of living.

In theory, a poverty rate can be set at whatever level based on whatever arbitrary criteria one chooses. In practice however, the US government’s official poverty rate (as utilized by federal agencies in decision making) has significant social and economic consequences.

The NRC explained in 1995:

The U.S. measure of poverty is an important social indicator that affects not only public perceptions of well-being in America, but also public policies and programs. The current measure was originally developed in the early 1960s as an indicator of the number and proportion of people with inadequate family incomes for needed consumption of food and other goods and services. At that time, the poverty "line" for a family of four had broad support. Since then, the poverty measure has been widely used for policy formation, program administration, analytical research, and general public understanding.

One quick way to improve such debates would be to do as the UN does and focus on poverty in terms of an income measured in dollars per day. So instead of talking about a percentage below a "poverty threshold" whose provenance date to the 1950s, we would discuss the number of people below an daily income threshold -- which in this case is $32.11 per day (recognizing that the official numbers do not fully represent what poor people actually live on, as mentioned above).

Of course this would lead to question such as, what is special about $32.11 per day? And, what is the full income distribution of Americans from top to bottom? The answer to both questions sets up a more informed discussion of poverty and inequality than one based on the very dated statistics of official poverty rates.

5 comments:

Thanks Roger I've always been suspicious of these numbers. The Economist had an article that suggested that the typical benefit package for the "poor" would be worth about $20K. I believe if you live in a place like NYC it could be well north of that.

We could replace the poverty rate with three indices, say: necessity, luxury, and opportunity. Each would represent a basket of items which are considered to be within that set. The purpose of these indices is to help identify and isolate cause and effect per community, family, and individual. The current standard, including the UN standard, is set in isolation. It is a poor model since it does not reflect reality. In particular, it is not adjusted for cost-of-living variances, which is typically determined by productivity, supply, and demand. It also assumes a homogenous global population, thereby attributing the same motivation and ambition to each population, which is a linear assumption with variable correlation. The underlying assumptions in the current models have lead to mischaracterization of the problems and misallocation of resources with increasingly counterproductive outcomes. In first-world nations, it can be credited with preserving a semi-peaceful status quo. In second and third-world nations, it has preserved a status quo, perhaps under hostile conditions.

"In other words, to be in poverty in the United States means that you have income three times greater than that determined necessary to consume an adequate diet as assessed in 1955. Today, that same that same multiplier would be closer to 8 as food represents a much smaller share of consumer spending."

Interesting background on the poverty level. Ddin't know it was tied solely to basic food needs. Obviously, the level is outdated if the food multiplier no longer holds. On the other hand, using a mutliplier of 8 would put the poverty level at 2.7 times what it is today. As someone who has lived much of his adult life below this level, I can attest that it is nothing like living in poverty, so maybe the original definition still makes sense, even if by accident.

It's interesting that the 'benefits package' does not count toward poverty statistics, because as Mike said in #1, the monetary value of those 'non-cash' benefits is indeed well north of $20,000. [If you can find it there's actually a study of this very thing done in Colorado].

The reality is unfortunate on a couple levels:

1. Folks that do not qualify for those same benefits because they make too much money instead have to dispense of their income on those same things (food, housing, home heating, etc.) and actually can end up with LESS disposable income than those in 'poverty' that receive the benefits.

2. Those impoverished benefit so greatly from the myriad of programs (sometimes more than 12 different ones at a time), and the income thresholds that govern these benefits are sometimes arranged as such a harsh 100% to 0% drop-off, that they are faced with a scenario where they would need to find a job that pays $40,000/year, or reject various employment opportunities to be able to retain the benefits that materially gain the the same earning. Even now there are several folks where I work right now that refuse anything more than part-time work because it would put them over for earning various benefits-- benefits that add value to their earnings that they could never end up earning on their own with the full-time hours here.

When I lost a job up in New England, for a few months I was able to do the same sort of experiment, researching and netting about a dozen different benefit opportunities (SNAP, WIC, home heating assistance, etc. etc.), when added to unemployment I actually "made" more money than when I was employed. It was actually a downer when looking at the money being offered at new jobs I was considering (because in many cases it was less, and I didn't have to work for the same, you know?)

But I was also on the low end... Some folks on just housing assistance alone can get a 5BR house in expensive Massachusetts for less than $100/month (their contribution). Do the math on how much money that saves (and how much their neighbor is spending).